What happened

Shares of Carvana (CVNA -0.90%) were rallying Thursday, one day after the stock plunged on news that its major creditors had teamed up to negotiate with the online used car dealer, a sign that they were preparing for the company to go bankrupt.

There was no specific news out on Carvana Thursday, but its recovery looked like a classic dead cat bounce. It seems at least some investors believe the stock was oversold after it fell 43% Wednesday.

On Thursday, the stock was up by about 20% as of 1:42 p.m. ET, recovering a bit more than a quarter of the prior day's losses.

So what

Several news items sparked the panic Thursday. First, Apollo and Pimco, two of Carvana's biggest creditors that together hold $4 billion of its debt, signed a deal to work together in the event of a bankruptcy. 

Relatedly, according to Bloomberg, Carvana has also consulted advisors about restructuring its debt. The details of those discussions are confidential, but a debt restructuring could lead to significant shareholder dilution if its creditors swap some debt for equity -- assuming the company is able to avoid bankruptcy. Alternatively, a bankruptcy would likely leave equity shareholders with nothing.

Carvana's debt is now trading at less than 45 cents on the dollar, showing that bond traders think a default is more likely than not.

Now what

The e-commerce company has been battered by falling used car prices, which have made it especially challenging to flip used cars. Despite years of rapid growth, Carvana has never been profitable on a GAAP basis, and this spring, it made an ill-timed $2 billion acquisition of ADESA, a used car auction platform.

The company says it has more than $4 billion in liquidity available, but half of that is tied to its real estate. It finished the last quarter with $316 million in cash and equivalents, and it lost more than $1 billion in free cash flow through the first three quarters of the year.

Carvana's future is closely connected to used car prices. If the market for those continues to sink, its bankruptcy may be unavoidable.